The International Monetary Fund urged the Lebanese government to increase electricity tariffs and freeze the implementation of the salary scale to avoid further rise in the budget deficit.

“The IMF underscored the need to reform the electricity sector by raising average tariffs toward costs recovery, while mitigating the impact on the poor and rebalancing freed-up resources toward capital and social spending,” the IMF said in its Executive Summary on Lebanon.

State-owned Electricite du Liban has urged the government to revise the current electricity rates to reduce the deficit and allow the company to supply more electricity to most Lebanese regions.

In this context, the IMF urged caution in implementing the planned salary scale adjustment for public sector employees.

“[IMF] Directors encouraged the authorities to undertake revenue-enhancing measures, such as broadening the tax base and strengthening collection, while ensuring that they are equitable and minimize distortions,” the statement said.

The IMF repeated calls to fully abide by a strict fiscal and monetary police in Lebanon in view of the harsh economic and political conditions in the country and the region.

“Directors considered that stronger fiscal management, including adhering to a budget calendar and pursuing a medium-term budget framework, would contribute to fiscal sustainability,” the IMF statement added.

They agreed that monetary policy should remain geared toward maintaining adequate foreign exchange reserves and supporting the exchange rate peg as a signal of commitment to macrofinancial stability. They encouraged the authorities to scale back the government’s reliance on Central Bank financing as fiscal consolidation advances, and take measures to further strengthen the Central Bank’s balance sheet.

This is the first time the IMF has explicitly called on the government to reduce its dependence on the financial resources of the Central Bank which has been very instrumental in financing the public debt through the issuance of Treasury bills and Eurobonds through the commercial banks that have snapped up most of these issues.

The directors noted that the banking sector has been resilient, but is facing an increasingly challenging environment. They emphasized the need to further strengthen capital buffers and improve loan classification and restructuring rules. They also encouraged further strengthening of the AML/CFT framework.

The IMF emphasized the importance of undertaking structural reforms to unlock Lebanon’s growth potential and improve social conditions. It called for measures to lower the cost of doing business and improving services, starting with electricity provision. Additional efforts are also needed to enhance labor markets and support job creation, while strengthening social safety nets. The directors encouraged the authorities to take further steps to improve Lebanon’s statistical system, building on ongoing progress.

“ Lebanon is facing a number of difficult challenges. The economy is suffering from abroad-based deterioration. Growth stood at 2.5 percent in 2012 and decelerated to 1.5 percent in 2013 as traditional drivers of growth – real estate-related activity, construction and tourism – have been affected by increasing uncertainty and worsening security. Inflation appears contained, though there are reportedly pressures on housing prices. The external current account deficit remained large at about 13 percent of GDP in 2012-13,” the IMF said.

The IMF reiterated its warning about the immediate economic impact of the Syrian refugees on Lebanon. “The crisis in Syria is having a dramatic impact on Lebanon. The refugee influx, according to United Nations figures, has reached one quarter of the population, fueling already high unemployment and poverty, and straining local communities and public services. The crisis has further exacerbated domestic political uncertainties,” the statement added.

It cautioned that without a resolution in Syria, economic performance is expected to remain weak, with high downside risks from a further weakening of public finances and delays in structural reforms.

“Growth is likely to be subdued at around 2 percent this year, reflecting domestic and regional uncertainties, and return only gradually to potential – a moderate 4 percent. Inflation could pick up with the planned salary increase. Financing needs would remain high, due to large fiscal and current account deficits,” the IMF said.